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| User Info | Option Question - How do I lock my profit?; entered at 2007-12-02 19:12:28 | |||
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Mikes Posts: 47 Registered: 2007-08-28 UK 
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write an apr 35 put and short the underlying, then buy a bond with the money from this this should in theory make your portfolio value independant of underlying price changes. if you analyse this, your portfolio at expiry has four terms: (i) the call has value max{0, S-E}. the former if you don't exercise, the latter representing the difference between the stock at expiry and the exercise price if you do exercise. (ii) the short position has value -S (iii) the put has value -max{0, E-S} (iv) the bond with value B at time zero put these together and your portfolio is: P = max{0, S-E} - S - max{0, E-S} + Be^(rT) if S > E at expiry, P = S - E - S - 0 + Be^(rT) = E + Be^(rT) if S < E at expiry, P = 0 - S - E + S + Be^(rT) = E + Be^(rT) your position is hedged since S does not appear in the equation. (all hedging costs such as spreads, broker fee and option costs are also not dependant on the movement of S until april) P is portfolio value B is the bond value at the start, with e^(rT) the interest rate factor earnt on the money. E is the exercise price (35) S is the stock price at expiry (APR 08) Last modified: 2007-12-02 19:22:59 by mikes
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